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The Tortoise Is in the Logo for a Reason

John Rogers invokes the fable of the tortoise and the hare to make the case for his patient approach to value investing

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Jun 22, 2017
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“There's no statistical evidence that human beings have an ability to move in and out of the markets effectively. It's next to impossible.” -John W. Rogers Jr.

For many, John W. Rogers Jr. is a columnist at Forbes magazine, a contributor to Intelligent Investing.

But beyond the column is a fund manager who has earned guru status by beating the S&P 500 on the long-term cumulative returns.

He is a deep-value investor, but one who emphasizes patience to generate long-term gains with reduced risk.

Who is

John Rogers (Trades, Portfolio)?

John W. Rogers Sr. had a good idea when he started buying his son stocks as birthday and Christmas presents. The younger Rogers got the investing bug at age 12, spent some summers working in a stock broker’s office (again, thanks to his father) and has gone on to become an investing guru.

The younger Rogers received a Bachelor of Arts degree, with an economics major, at Princeton University. Then, after a couple of years as a stockbroker at William Blair & Co., he founded Ariel Investments in 1983 with $10,000. His approach in starting the firm was “a patient, value strategy in small and medium-size companies.” Today, he and his firm manage more than $11 billion.

In addition to sitting on the corporate boards of Exelon Corp. (EXC) and McDonald's Corp. (MCD), Rogers has also been a youth and community volunteer in Chicago. His efforts have been recognized in many ways, including membership in the American Academy of Arts and Sciences.

He belonged to the inner circle that advised Barack Obama on his first presidential race and went on to serve as co-chair of the Presidential Inaugural Committee of 2009 and, more recently, joined the board of the Barack Obama Foundation.

According to his firm's website, Rogers, now age 58, is chairman, CEO, chief investment officer and lead portfolio manager for the Ariel Fund and co-portfolio manager for Ariel’s small-cap, small/mid-cap and mid-cap products and Ariel Appreciation Fund.

This guru developed a passion for stocks and the market at an early age. Through the firm he created, he has stayed involved in the investing business as well as being widely involved in his community.

What is Ariel Investments?

Ariel Investments LLC is an investment advisory firm. Based in Chicago, it has branch offices in New York City and Sydney, Australia.

Its investment management services are provided for mutual fund portfolios, separate account clients and a private fund for eligible investors. Separate account clients include government and corporate retirement plans, corporations, insurance companies, union plans, charitable organizations and high net worth individuals.

Currently, its website lists assets under management at $11.7 billion.

Through the Ariel Investment Trust, the firm manages six mutual funds:

  • Ariel Fund: small/mid-cap value fund
  • Ariel Appreciation Fund: mid-cap value fund
  • Ariel Focus Fund: all cap value fund
  • Ariel Discovery Fund: small-cap, deep value
  • Ariel International Fund: developed international markets
  • Ariel Global Fund: American, developed and emerging markets

Under the banner of Separate Accounts, it manages:

  • Ariel Small Cap Value: $200 million to $2 billion caps
  • Ariel Small/Mid Cap Value: $1 billion to $7.5 billion
  • Ariel Mid Cap Value: $2 billion to $15 billion
  • Ariel Focused Value: all cap
  • Ariel Micro-Cap Value: deep value, under $500 million
  • Ariel Small Cap Deep Value: under $2 billion
  • Ariel International (DM): all cap, developed international markets
  • Ariel International (DM/EM): all cap, developed and emerging markets
  • Ariel Global: all cap, American, developed and emerging markets

Rogers manages or co-manages the small and mid-cap funds.

The guru's firm focuses primarily on small and mid-cap funds, and searches for companies that have a value or deep-value profile. The international funds take a more relaxed position on market capitalization.

Rogers’ investing philosophy and strategy

On the Ariel website, Rogers and his team outline their investing philosophy in four points:

  • Patience: A consistent long-term view—their motto is “Slow and steady wins the race.”
  • Independence: Investing to meet their convictions, not the benchmarks.
  • Expertise: Bottom-up fundamental research.
  • Teamwork: Investment management is a team, not an individual, effort.

Strategically, they seek out "attractive intrinsic value" through three approaches:

  • Value: Products are designed as a strong complement to core portfolios, with minimal correlation to benchmarks and peers and a bias toward high-quality companies.
  • Deep value: They try to find names with low correlation, offering low risk and high returns.
  • Global: The goal is to generate absolute and relative long-term outperformance, with lower risk.

The strategy is further fleshed out in the firm's Form ADV Part 2A. In it, they explain the process they use for the traditional value funds:

  • Managers and analysts monitor a proprietary watchlist, made up of current, former and potential candidate companies.
  • They research these companies through reading and meeting with industry contacts.
  • From this initial research, they try to identify what others (the market) are missing.
  • Next, they question company management and independent sources to fill in the blanks (the missing elements), and using all the pieces, put together a long-term picture.
  • Analysts develop valuations using discounted cash flow analysis, change of control estimates and full trading value.
  • Rogers and his team try to buy companies that trade at a discount of 40% or more to the private market value they have calculated. Alternatively, they look for stocks trading for 13 times or less forward cash earnings estimates.
  • They will only buy names within their "circle of competence."
  • They try to stay fully invested at all times, avoiding any temptation to time the market.

For deep-value funds, the process also involves:

  • A more limited watchlist; about 75 names are closely followed.
  • There is emphasis on price, based on book value (preferably 1 time or below), tangible book value and cash.
  • They look for alignment of management’s interests with those of shareholders.
  • A variety of measures is used to determine the gap between the price and intrinsic value (margin of safety).

Writing in the quarterly commentary for the first quarter of calendar 2016, Rogers commented on a few of their stocks, and gave further insight into their thinking:

  • Among the first-quarter winners was Viacom Inc. (VIAB); Rogers says he likes new CEO Bob Bakish’s five-point strategy. In particular, they like the emphasis on six flagship brands. They also liked his decision to replace the CEO of Paramount, which has underperformed.
  • The fund also benefited from the strength of Kennametal Inc. (KMT, Financial), a cutting tools maker. Its stock was up thanks to optimistic guidance and the assumption it would profit if U.S. trade policy became more protectionist. However, Rogers notes these are short-term advantages; what really counts is Kennametal's "strong positioning in a small but crucial niche business."
  • Bristow Group Inc. (BRS) lost a quarter of its market value in those three months; it is a helicopter transport company supplier and its price dropped along with oil prices. Despite that, Rogers says they are sticking with the stock because oil is a necessity and other companies will continue to need Bristow's services.
  • Dun & Bradstreet Corp. (DNB) also fell, but again the Ariel team is staying in. Rogers says the market was disappointed with the restructuring of the company's relationship with Salesforce.com Inc. (CRM). While growth has been slower than expected, they believe Dun & Bradstreet is well positioned for the long term.
  • They did not establish any new holdings during the quarter, nor did they sell out of any positions.
  • Looking at the economy, he is reasonably optimistic because inflation and unemployment are low, while growth is continuing. Still, he remains concerned about U.S. market valuations, with the S&P 500 trading at 18 times forward earnings. He says this is above average but not in dangerous territory.
  • Rogers also argues high valuations could mean problems for passive investors, who will suffer losses if or when valuations fall. Active managers, on the other hand, can assemble a portfolio with lower valuation levels and would suffer less in a downturn.

Patience is the first of the philosophical principles Rogers and his team lay down in describing their approach to investing. And that principle shows up in Ariel’s response to the winners and losers in the first quarter of the year. They are not taking profits on the stocks that went up, and they are not dumping those that declined. Instead, they see profits, or further profits, in holding for the long term.

Current holdings

The following GuruFocus chart shows Rogers currently likes financial and consumer cyclical stocks:

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These are Rogers’ top 10 holdings, as of March 31:

If interest rates do rise—now that there is a new outlook at the Federal Reserve—Rogers and the Ariel funds stand to do well given their strong commitment to financial stocks. If they do not rise, consumer cyclicals and other sectors will have to carry a heavy load.

Performance

After struggling in 2014 and 2015, Rogers managed to get ahead of the S&P 500 again in 2016; also, note the exceptional performance—nearly 45%--in 2013:

430462909.jpg

Rogers has done well in comparison with the S&P 500 over longer cumulative periods as well; average annual returns are shown below, along with excess over the S&P 500 in brackets:

  • 15 years: 8.2% (1.5%)
  • 20 years: 10.1% (2.4%)
  • 25 years: 10.3% (1.2%)
  • 30 years: 11.4% (1.2%)

This graph, from the most recent Ariel Fund Fact Sheet, shows how the fund has done when compared with other benchmarks:

196498167.jpg

There are some years in which a value strategy does not work; as noted above, Rogers ceded the lead to the S&P 500 in 2014 and 2015. Yet, investors who can ride out the lows should enjoy the long-term results.

Conclusion

Rogers won his place at the gurus' table through a combination of several characteristics—the most important of them being patience and a focus on small and mid-cap stocks.

Patience is definitely a virtue when dealing with the smaller caps. Given their volatility, they can upset the plans of impatient investors.

By investing in companies and industries that he and his team know well, within their circle of competence, and by intensively researching a limited number of names, they can have confidence in their picks.

Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.

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